Getting a business loan can be an incredibly frustrating and stressful process, particularly if you are applying for a loan for the first time. Lenders are usually more cautious about letting first-time applicants borrow as they are viewed as higher risk.
Fortunately, however, there are steps you can take to improve your chances of success, as we explain below.
1. Invest your own money
Investing some of your own money into your business can also prove to lenders that you are committed and have confidence in the business. As a general rule, lenders like owners to have at least 25% equity in the business they are going to finance.
If you have any assets you can put up as collateral (security) for the loan, it’s also worth mentioning this on your application. Lenders will be looking for commitment – assurance that it is in the business’ interest to repay the loan to protect their assets – and this will help to communicate this.
2. Check your credit score
Lenders are more likely to approve your loan application if you have a good credit score, so before you apply, check your credit report and get to know your business credit score.
There are a number of steps you can take to improve your credit score, as we have outlined below:
- Pay your bills and invoices on time: paying bills in a timely manner is an easy way to improve your business credit score and, as payment terms are considered a form of credit, paying invoices promptly will help too
- Correct mistakes on your report: check all details carefully and correct any errors straight away – it’s important to update credit reference agencies if the business location or status changes
- Limit credit applications: try to avoid applying for multiple lines of credit in a short space of time as this can suggest a business is struggling to secure financing and will negatively affect your credit score. Multiple business applications will also often mean multiple soft personal credit searches – something to keep in mind to avoid a negative result in this area as well. Ask a lender for a quote to get a better idea of how much you can borrow as this won’t require a hard check, so it won’t be recorded on your business credit report
- Keep your credit utilisation low: this is how much of your available credit limit you use. So if you have a credit limit of £10,000 and you have used £5,000 of that, your credit utilisation will be 50%, so you’re using half your credit limit. To keep lenders happy, it’s best to keep your credit utilisation at 25% or below
- Collaborate with business partners and suppliers: ask them to share data on your payments records with credit reference agencies to help give your score a boost
- Look at your own credit score: business start-ups are likely to have a thin business credit history, in which case lenders may look at your personal credit score to assess your creditworthiness. It therefore pays to check your own credit score and ensure your personal finances are up to scratch too
3. Improve your business health
Lenders will also want to look at your overall business health and this doesn’t always mean your business’ finances – though that will play a part too. As well as looking at your gross monthly revenue, lenders may assess the business’ leadership, production process, marketing and even customer service before deciding whether to let you borrow. The healthier your business is, the more likely your application will be accepted.
4. Compare your options
Loan providers often have different lending criteria, so it pays to do your research and compare your options carefully. While some lenders might reject your application, others might accept it. Remember that you don’t have to borrow from your local bank – instead, compare several quotes from several lenders. A really easy way to do this is through our comparison tool.
The team of experts at Swoop will be happy to explain the best way for you to go about funding your small business.
Get in touch today.
Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.